Munger Says He Told Buffett of Stake in BYD, Recused Himself

By Noah Buhayar -
Apr 5, 2011

Berkshire Hathaway Inc. (BRK/A) Vice
Chairman Charles Munger said his family was invested in BYD Co.
“for years” before his company took a stake in the Chinese
automaker and that he disclosed the financial interest to his
business partner Warren Buffett.

“I certainly suggested that Berkshire look at investing in
something that the Mungers were already invested in, but we’d
been in it for years,” he said yesterday in a phone interview.

The Munger investment was cited last week by former
Berkshire manager David Sokol in a CNBC interview as precedent
for his purchase of Lubrizol Corp. (LZ) shares before recommending
the company as a takeover target to Buffett. Sokol, whose
resignation from Omaha, Nebraska-based Berkshire was announced
by Buffett on March 30, said there was nothing unethical about
purchasing about 96,000 Lubrizol shares in January.

“I don’t believe I did anything wrong,” Sokol said,
according to a transcript on CNBC’s website. “Mr. Munger owned
a significant piece of BYD before he mentioned it to me to go
look at it.”

Munger, 87, said his family invested with money manager Li Lu in BYD through a partnership that has a stake of about 3
percent and that he urged Sokol, then the leader of Berkshire’s
energy business, to scout the business.

“I had Dave look at it, because I knew I couldn’t talk
Warren into buying into the damn thing by myself,” Munger said.
“It’s a new technology-type investment. But David went over
there, and he made the deal for Berkshire.” Buffett is
Berkshire’s chairman and chief executive officer.

Berkshire’s Investment

Berkshire invested about $230 million in BYD in 2008 and
holds a stake of almost 10 percent in the company. The
investment was valued at $1.18 billion at the end of 2010,
Buffett said in the company’s annual report. BYD, based in
Shenzhen, has said it aims to begin selling electric and hybrid
cars in Europe by the end of next year.

Munger said his family holds a “little more” than half of
the fund with the BYD investment, and that he didn’t participate
in Berkshire’s discussions on its deal.

“I recused myself,” Munger said. “But there’s no
question about it, that I caused Dave’s original interest.” He
declined to comment further.

BYD has dropped 30 percent since Dec. 31 in Hong Kong
trading and fell 40 percent last year after increasing fivefold
in 2009. The stock fell 0.7 percent to HK$28.80 as of 10:55 a.m.

Lubrizol Deal

Buffett, 80, said March 14 he would pay $135 a share, or
about $9 billion, for Wickliffe, Ohio-based Lubrizol, compared
with the closing price of $105.44 on the New York Stock Exchange
in the last trading day before the announcement. Sokol’s
investment may have given him a profit of about $3 million,
according to Buffett’s disclosure and data compiled by Bloomberg.
Buffett said in the statement that Sokol made a “passing
remark” about his stake in Lubrizol.

The Munger investment in BYD is different from Sokol’s in
Lubrizol because of the longer amount of time that elapsed
before Berkshire announced its intention to acquire shares, said
James Cox, a professor of corporate and securities law at Duke
University Law School in Durham, North Carolina.

“What really matters is the close time sequence that we
all now know that Sokol made the investment,” he said.

SEC Probe

The Securities and Exchange Commission is probing whether
Sokol, 54, bought shares in Lubrizol on inside information that
Berkshire was considering buying the company, according to a
person who declined to be identified because the investigation
is secret. The SEC is seeking records from Sokol’s brokerage and
examining trading data from the Financial Industry Regulatory
Authority, the person said last week. Buffett said March 30 that
he doesn’t think Sokol’s purchases were unlawful.

Munger’s account of the BYD investments doesn’t raise “any
taint or question mark” for Berkshire, said John Coffee, a
securities law professor at Columbia University.

“There’s always going to be some possibility that a
director will have some interest in a company that your firm is
looking at for a transaction and you disclose that and you
recuse yourself,” Coffee said.

Buffett didn’t immediately respond to a message left with
an assistant for comment.